Can Bailouts Give CEOs an Incentive to Build the Middle Class?

Lawmakers opposing the automaker bailout have been insisting they stand on “free enterprise” principles. Companies in the private sector, these legislators pronounce, should not be begging the public sector for help. And if private enterprises should go under without that help, so be it.

“Companies fail every day and others take their place,” as Senator Richard Shelby, a bailout opponent from Alabama, has bluntly put it.

Politicos like Shelby paint the private and public sectors as two entirely separate spheres, the one bankrolled by taxpayers over here, the other pumped up by marketplace transactions over there. In reality, of course, no clear, clean “bright line” separates our private sector from our public. The two, day after day, waltz through modern economic life as an inseparable couple.

Government, at all levels, is endlessly interfacing with the private sector. Public bodies routinely procure goods and services from private businesses. Lawmakers, just as routinely, vote businesses a steady stream of subsidies and development grants. Indeed, sooner or later, virtually every major American business interacts significantly with the public sector, in some way, shape, or form.

This fall’s bailouts, taken from this perspective, amount to economic business as usual.

But the current bailouts, both those already in place and those in the offing, also amount to something else: a real opportunity, at long last, to leverage the power of our public purse on behalf of average Americans.

We Americans have been trying to do this leveraging for some time now. As a society, we recognized years ago — in the Great Depression — that tax dollars passed to the private sector, if spent unwisely, can make life appreciably worse for average households.

The bidding process for government contracts, for instance, “gives a natural advantage” to those bidders who pay their workers the least, as the Center for American Progress noted last week in a new report, Making Contracting Work for the United States. The less a business pays in wages, the lower a bid that business can offer.

Between 1931 and 1965, Congress would pass a series of laws designed to erase this “natural advantage.” These legislative actions required the businesses that seek our tax dollars to pay their workers the local “prevailing wage.”

Lawmakers back in those mid-20th century years understood, as Solicitor of Labor Charles Donahue observed over four decades ago, that “substandard wages must inevitably lead to substandard performance” — and leave the economy reeling from reduced worker “purchasing power.”

But the “prevailing wage” laws that officials like Donahue so prized have gone poorly enforced for years now. Taxpayer dollars, the new Center for American Progress study released last week documents, are gushing into companies that pay substandard wages and expose workers to unsafe working conditions.

One key reason: No existing federal contracting regulations put any real limits on the rewards that can go to executives at the top of the corporate ladder. Without these limits, the executives of companies that seek federal dollars have a powerful incentive to exploit their workers. The more they exploit workers, the greater their potential payoff.

Earlier this fall, in the opening weeks of the financial meltdown, lawmakers in Congress vowed that no top executives would get rich off the bailout they were preparing. But those lawmakers then passed legislation that did precious little to roll back rewards at the top.

In last week’s automaker bailout debate, many lawmakers seemed genuinely interested in making amends. They passed, in the House, an auto bailout that tightened controls on executive pay — by prohibiting any bailed-out automaker from “paying or accruing any bonus or incentive compensation” to their 25 top-paid employees.

Another provision in the House bailout banned any pay plan that would encourage the manipulation of an automaker’s reported earnings “to enhance the compensation” of any top executive.

Nice provisions, but vague. Lawmakers could be doing more. They could be using the bailout to set a specific executive compensation standard that could help reorient Corporate America’s entire approach to executive pay.

The current approach, as recent Wall Street and Detroit history has demonstrated, rewards executives for making decisions that fatten the short-term corporate bottom line at the expense of an enterprise’s long-term health and viability. Executives who rush into mergers, raid pension funds, downsize workforces, hoodwink consumers, and slash R&D can easily boost their corporate quarterly earnings enough to ensure themselves handsome windfalls.

Executives who actually try to improve their enterprises, on the other hand, may not even be around when the time-consuming work of building a better company from the bottom up — the employee training, the building of workplace trust, the product and consumer research — begins to bear fruit.

How could Congress structure bailouts to encourage executives to nurture long-term enterprise effectiveness? What could Congress do to discourage the destructive short-term executive behaviors that make for defective enterprises? Congress could start linking the rewards that go to executives at the corporate top to the well-being of workers at the corporate bottom.

Rep. Barbara Lee from California has already introduced legislation that offers a useful benchmark standard for doing just that. Her pending Income Equity Act would deny companies tax deductions on any executive pay that runs over 25 times the pay of a company’s lowest-paid worker.

Last year, the typical big-time U.S. CEO made 344 times the pay of average American workers.

Rep. Lee’s ratio — a pay range that has roots deep in the research literature on enterprise effectiveness — could become our new bailout standard: No tax dollars to any enterprise where executives take home over 25 times the compensation of their workers.

With a standard this clear in place, top corporate executives would have a powerful incentive to pay their workers more — and an equally powerful incentive to exploit their workers less.

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About Sam Pizzigati

Labor journalist Sam Pizzigati, an Institute for Policy Studies associate fellow, co-edits Inequality.org. Among his books: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970 (Seven Stories Press, 2012) and The Case for a Maximum Wage (Polity, 2018).